TMI Blog2019 (6) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the new arrangement, the Parties did not negotiate a separate non-compete fee for the assessee. The reason for entering into a supplementary non-competition agreement on 14.01.2002 as noted by the Ld. CIT(A) was on account of the takeover of Vossloh, Germany by Matsuhita, Japan. That the supplementary non-competition agreement was executed on 14.01.2002 is also borne out by the fact that in the minutes of the meeting of the Board of Directors of VSIN held on 27.02.2002, the said supplementary non-competition agreement was approved. The above facts are not in dispute. The AO has made the addition of ₹ 5,00,000/- towards non-compete agreement because of insertion of sub-clause (va) to section 28 by the Finance Act, 2002 w.e.f. 01.04.2003. As the reason given by the AO is not a plausible one as described above, we dismiss the 1st ground of appeal. Correct head of income -Termination Fee and 'Severance' payment received by the assessee pursuant to the Termination Agreement - 'Capital Gains, Income from Other Sources or Salary receipt - HELD THAT:- As the sum as termination fee and as severance fee have been received by the assessee towards termination of Jo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself was re-negotiated in August 2003 under which the shareholding pattern in VSIN was modified along with several terms and conditions. Under the said re-negotiated agreement, all the agreements entered in 1998 were terminated including the Non-Competition Agreement dated 31.03.1998. The Non-Competition amount due to the assessee translated as under: Under Agreement dated July 14, 1998, the appellant received a sum of ₹ 50,00,000/- as a deposit to be adjusted over a period of 10 years @ ₹ 5,00,000/- subject to understanding that the arrangement can be terminated with a written notice at the end of each year. Under Supplementary Agreement dated January 14, 2002, the Appellant and Vossloh agreed that the condition for annual option to terminate was removed with the result the amount lying in deposit of ₹ 35,00,000/- at the time became fully due to the Appellant. The Joint Venture itself was re-negotiated with effect from August 8, 2003 under which the Non-Competition Agreement along with all other documents were terminated and fresh arrangements were put in place. However, under the new agreement, the Parties did not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lumpsum consideration towards the non-compete covenants for the remaining period of the non-compete fees. Consequently, the balance amount of ₹ 35,00,000/- ceased to retain the character of deposit in the hands of the assessee and thus became consideration for the previous year relevant to the AY 2002-03. Holding that the assessee has rightfully disclosed the said amount in the return of income for AY 2002-03, claiming it as a capital receipt, the Ld. CIT(A) deleted the addition of ₹ 5,00,000/- made by the AO towards non-compete fees. 5. Before us, the Ld. DR relies on the order of the AO and submits that in the 1st three years, the assessee itself treated only an amount of ₹ 5,00,000/- as income for the year. It was only in the AY 2002-03 that the balance amount was treated as income. The Ld. DR argues that this was done to avoid payment of taxes because non-compete fees was made taxable by virtue of insertion of sub-clause (va) to section 28 by the Finance Act, 2002 w.e.f. 01.04.2003. Thus it is argued that the addition made by the AO be restored. 6. On the other hand the Ld. counsel of the assessee submits that from a factual pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-competition agreement was approved. The above facts are not in dispute. The AO has made the addition of ₹ 5,00,000/- towards non-compete agreement because of insertion of sub-clause (va) to section 28 by the Finance Act, 2002 w.e.f. 01.04.2003. As the reason given by the AO is not a plausible one as described above, we dismiss the 1st ground of appeal. 8. The 2nd ground of appeal On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in treating as Capital Gains the Termination Fee of ₹ 2,56,19,997/- and 'Severance' payment of ₹ 45,12,446/- received by the assessee pursuant to the Termination Agreement dated 31stJuly, 2006 and offered to tax under the head 'Capital Gains' but taxed by the A.O. under the head Income from Other Sources and 'Salary' respectively, without appreciating the facts that the payment was in fact made by SKS Group including Candlelight to the assessee without any consideration. The ability of doing business which was terminated was in respect of me company which is a separate entity. The director of the company or any other perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onic Works Vossloh Schwab GmbH. Accordingly, the assessee received a sum of ₹ 3,01,32,443/- being ₹ 2,56,19,997/- as termination fee and ₹ 45,12,446/- as severance fee. Both the amounts were received towards termination of JV. In the case of Kettlewell Bullen Co. Ltd. v. CIT (1964) LIII ITR 261 (SC), the Hon ble Supreme Court observed as under: It cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of this contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee s income, the payment made to compensate f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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